Sinopec Sinks as Jefferies Says China SOE Reform Bets MisplacedWeiyi Lim
China Petroleum & Chemical Corp.’s biggest rally in Shanghai trading since 2009 was unjustified because the company’s plans to seek private investors are aimed at raising capital instead of reforming the state-controlled energy producer, according to Jefferies Hong Kong Ltd.
The brokerage downgraded the stock to hold from buy after the shares rose yesterday by the 10 percent daily limit in Shanghai and jumped 9.4 percent in Hong Kong. Sinopec, as the Beijing-based company is known, sank as much as 7.2 percent in Shanghai today, the biggest loss since August 2009, and closed down 3.1 percent at 5.01 yuan. The Hong Kong-listed shares fell 1.2 percent to HK$6.54.
Sinopec led gains by state-owned energy companies including PetroChina Ltd. yesterday amid speculation the plan to sell as much as 30 percent in its oil-retail unit was the start of reforms to loosen the government’s grip on major industries. That optimism was misplaced because Sinopec will probably just use the proceeds to buy assets from its parent, Jefferies said.
“The market interpreted this as SOE reform,” Laban Yu, an analyst at Jefferies, wrote in a report dated yesterday. “To us, it appears more like stealth capital raising.”
Analysts are divided on the benefits of the plan. China International Capital Corp. said Sinopec’s sale will boost the nation’s stock market as investors anticipate more state-owned enterprises will enact reforms. Credit Suisse Group AG said that while it’s a step in the right direction, this isn’t a “game changer” for reforms because the government will still have a say in appointing managers.
“Management appointments driven by a bureaucratic process with strong political considerations are usually not conducive for getting good managers,” Vincent Chan, an analyst at Credit Suisse, wrote in a report dated yesterday.
Vitol Group, the biggest independent oil trader, isn’t interested in buying a stake in Sinopec’s unit, Chief Executive Officer Ian Taylor told reporters in Melbourne today. China is a controlled market and companies are “not on a level playing field,” he said.
China’s Communist Party unveiled plans in November for the biggest expansion of economic freedoms since at least the 1990s, including more private investment in state businesses and a looser one-child policy. Productivity at China’s government-owned firms has trailed that of private companies the past three decades, the World Bank said in February 2012.
PetroChina dropped 3.9 percent to 7.68 yuan, following yesterday’s 4.7 percent rally. Sinopec Shanghai Petrochemical Co. slid 9.6 percent to 3.48 yuan. The benchmark Shanghai Composite Index retreated 1.1 percent, the most since Jan. 6.
Sinopec’s oil-retail business operates China’s largest network of more than 30,000 fuel stations. Selling 30 percent could raise more than $20 billion, Somshankar Sinha, an analyst at Barclays Plc, wrote in a research note.
“There is nothing in this restructuring that fundamentally changes management incentives” at the listed company or parent level, Jefferies’s Yu wrote in the report. Sinopec will probably use the funds to buy assets from its parent at “the highest prices acceptable to minority shareholders,” Yu wrote.
Jefferies lowered its price target for the Shanghai-listed shares to 5.50 yuan from 5.90 yuan, and cut the Hong Kong estimate to HK$7 from HK$7.50.
There are 27 buy ratings by analysts on the Hong Kong-listed shares, four holds and three sells, according to data compiled by Bloomberg. The Shanghai shares have 11 buy ratings and one sell.
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